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Earnings Call Transcript 2022-Q1

[Oyvind Birkenes, executive]

Hello and welcome to the First Quarter Presentation of Airthings in 2022. I'm Oyvind, the CEO. And with me today, I have our new CFO, Jeremy Gerst. Jeremy?

[Jeremy Gerst, executive]

Yes. Hi. Jeremy just joined Airthings in the beginning of April. Before coming to Airthings, I worked for reMarkable for about 5 years as their CFO. And prior to that, I have experience from BCG and the Federal Reserve Bank of San Francisco within the Economic Research and Monetary Policy Division. Very excited to be joining the Airthings team.

[Oyvind Birkenes, executive]

Thank you. We are going to hear more from Jeremy during the financial update. And please send questions in the chat. There is about 20 seconds delay, so if you send it and then we'll have it ready at the Q&A session.

I want to remind everybody about the purpose at Airthings, to empower the world to breathe better. And we are very focused on our purpose at Airthings. It's all about this. And Airthings should be good for people, good for the planet, and good for business. And the air we breathe has much bigger impact on our health and wellbeing than most people think. And also, by making buildings smarter with our solutions, we can create healthier indoor environments while also saving energy consumptions of buildings. So this is our focus at Airthings.

So we are continuing our strong growth journey. In 2021, we had a challenging year with the supply limitations. Now in the first quarter, we've been able to build up stock of our key products. And as we reported in the annual report a few weeks back, we have now converted to IFRS and also our numbers are now in US dollars. Last year, we grew our revenue with about 60% year-over-year, and I'll come back to the first-quarter results. But what we can say is that we have a higher share now of revenues coming from Europe and the rest of the world versus what we presented earlier. It's about 40% to 60% split.

We see strong momentum in Airthings for Business and also in our consumer segment. We are adding and growing with existing retailers for consumers and we're also adding new partners for Airthings for Business and also growing mostly with existing partners. One we added is, for example, Sodexo, and I'll come back to that later. There are also enormous amount of brand awareness during the first quarter and record-high unique web sessions, and we'll come back to some of the details on what happened there. So things are really moving in the right direction. We are continuing our strong growth, and we are really looking forward to the next quarters coming as well.

So 41% in that first quarter with sales revenues of $9.1 million. We had a gross profit margin of 59%, which is about the same as we had the same quarter last year. And the gross profit margin, as we talked about before, it varies a bit quarter to quarter and is impacted by component costs and also the product and channel mix in the consumer segment.

We have been able to resupply inventory of the View series, which we had big challenge with in last half of 2021. We are guiding in the second quarter between $8 to $9 million, and there is still some risk for components moving forward as the market is a bit unpredictable. And then we also see some headwinds to the consumer's sentiment, and we're a bit cautious in the form of inflation and the war in Ukraine. It creates some uncertainty moving forward. But our guiding window is going to be from $8 to $9 million for the second quarter.

Some of the first-quarter highlights. Our revenue continuing with strong growth and also in ARR, where we grew by 87% to $3.1 million. Enormous amount of attention to Airthings as a brand started off with CES and AHR earlier this year and then following up also with Airthings Masters that created a lot of followers for us.

We continue to see very strong development in Airthings for Business where we also have some cases like Sodexo and Microsoft that I'm going to come back to. And we also see a lot of attention with schools now in the Netherlands. We started an [ outoship ] 4,000 units in the first quarter as there is now a lot of demand for air quality monitoring at schools in Netherlands, and we have some really great partners working with us down there.

We also certified our products for Airthings for Business in Japan. It's a very high bar to get certified in Japan with very strict regulations, but we are already now shipping products in the second quarter, and there's several partners that have very interesting projects that are going on there.

And on the side we have now decided to discontinue our Airtight as a separate product, a separate solution, and to sell it as a separate product to the customers. We see that the technology of Airtight with differential pressure works better in the rest of our devices, and they'll bring it in as part of the Airthings solutions in other products in the future. So it's been a disappointment for us, for sure, and the team to see this, but we don't change and there were plans moving forward that the Airtight business has been very small of our Airthings for Business overall segment. So we are moving forward. We will bring in the technology and the innovations from Airtight into the rest of the Airthings products in the future.

The disappointment for the first quarter was really the pro segment, which went down in revenue. And we see a very challenging home inspector market still in the US, which is the main supplier where we have this pro instruments. So we'll talk a bit more about that, but it looks to improve moving forward, but we're a bit cautious still in this home inspector market as the housing market in the US has been so hot that people don't do their home inspections.

So I'll do an update by the segment. So starting with the consumer segments, which is basically for everyone with a home following up with Airthings for Business, which is for all commercial buildings and public buildings, and then offer solutions for the professionals. So consumer delivered a strong quarter, $6.1 million in the first quarter with 42% year-over-year growth. And gross profit margin of 55%, 1 percentage point down year-over-year.

We are expanding further with our key retailers in North America, like with Home Depot and Canadian Tire really expanding even more over products in more stores. We are also now rolled out into Officeworks in Australia, both in-store and online, which is a key DIY chain across Australia.

We have signed on a new distributor for the Nordics with Exertis, very professional distributor which is going to help us moving forward. And then we these some uncertainties affecting the consumer sentiment moving forward with inflation and the war and what's happening in that market, so we're a bit cautious on what we're doing forward but really strong belief certainly for consumer in the segment in the longer term.

For Airthings for Business, it grew to $2.2 million with more than 100% year-over-year growth. Gross profit margins of 60.4%. And we see now that Airthings for Business is taking a larger share of our overall revenues. We're now 25% for the first quarter. We ship now a lot in Netherlands, so that's a key milestone, and we see still a very strong underlying growth for a range of broad partners and customers.

If you'll see in the bar graph, we have kind of marked out what went to that Quebec product. So if you take out the Quebec product, which is a special product, and we're going to see-- For sure, our plans is to see more products like that moving forward, but if you look at the more broad underlying growth underneath the Quebec product, you will see that we have still strong quarter-over-quarter growth every quarter.

We have done some restructuring of the Airthings for Business commercial team in the US, so there are changes ongoing there, which is going to step back a little bit the performance from Airthings for Business in the US, but we have got a really strong team, building up a very strong team, got a really strong leader there, and we are going to foresee. We have very high beliefs in what this team is going to deliver over the coming quarters.

And as we mentioned, we signed on Sodexo as one of our new partners in France. And one of the projects there now is to roll out the Microsoft headquarter in Paris. It’s a quite big project for us to monitor the air quality in their complete office in Paris. So we have started to ship this project, and we see promising opportunities in the future with Sodexo for sure. So this is just one example of a highlight I wanted to present now for the first quarter. There are now more than 35,000 active devices in the field that are with the subscriptions for Airthings for Business. This has more than tripled over the last year.

Looking at that pro segment, a little bit of sales revenue of $0.7 million, which is actually 29% down year-over-year, and this is really because the housing market in the U.S. is very challenging, and there's even companies buying up the houses and they don't do the home inspections. The data showing now for the second quarter looks more promising for us, but we're still cautious in the segment. Very strong gross profit margins with 87.7% for the professional market in the first quarter, and that's really driven because we have lower product sales, and then they have a higher share of calibrations and rentals that have higher gross profit margins.

And our recurring revenue grew to $3.1 million, so 87% up year-over-year. There’s still very strong gross profit margins from ARR a bit more than 80%, and we are guiding the second quarter to be between $3.3 to $3.7 million and really driven by the growth in Airthings for Business.

When it comes to the brand awareness, it's been very strong and we have record-high unique web sessions in the first quarter with 1.2 million. Always first quarter is a strong quarter for us. And we will not see the same numbers in the second quarter, but it's really amazing to see how much traffic we get. And then we do brand measurements of Airthings. We see that they're really improving the brand awareness strongly in our key markets. And Airthings Masters was a big project for us in the first quarter, and it's generating enormous amount of press and interest from around the world.

I want to highlight that we're coming with our second sustainability report. It's going to be released the next week, that's the plan. We got the silver medal score from EcoVadis last year, which means we are scoring very high and actually higher than 78% of our peers. This sustainability report is a very solid good report made by the team. We have really made great progress in ESG and sustainability over the last year. We have done lifecycle assessments of our products, and we have done several case studies with our customers to see how much energy consumption we can save by making existing buildings smarter with our solutions.

So that's going to be interesting. You'll see more about that report in the coming days or next week. Then I'll send it over to Jeremy to talk about the financials.

[Jeremy Gerst, executive]

Thank you, Oyvind. Yes, starting with the income statement, as Oyvind mentioned, revenues for the first quarter came in at $9.1 million up 41% year-on-year. Growth margins were 59%, which is exactly in line with last year, and slightly up from the fourth quarter. As I even mentioned, some fluctuations in the growth margin can be expected quarter to quarter due to component cost inflation and product mix and channel mix.

In terms of EBITDA, it came in at -- $3.4 million, representing a margin of -- 38%. This is a slight improvement from the same quarter last year, where it was -- 41%, and this reflects continued willingness in the company to invest in personnel to meet our long-term growth targets. Going down to EBIT, it was -- $3.8 million, and this is mostly driven by depreciation of right of use assets in accordance with the IFRS 16.

Moving on with the balance sheet, in terms of change of assets, we've seen an increase in the deferred tax asset. This is due to losses over the period. Inventory increases reflect the successful efforts to secure supply, and an increase in receivables is mostly driven by one of our mitigating actions to secure supply of finished goods in future quarters, and that's in terms of prepayments on critical components.

In terms of liabilities, we've seen a slight decrease in long-term liabilities, although it's mostly on par with the same quarter last year. Accounts payable has grown, and that's to be expected for a company in growth like Airthings. And in terms of other current liabilities, the change is mostly driven by accrued subscription revenues and accrued expenses.

Turning finally to the cash flow statement, the cash from operating activities was -- $6.4 million, mostly driven by 2 factors. One is operating losses in the quarter, and the other is cash that's been moved into the networking capital. And this is mostly a positive thing as it's reflected in increase in inventories given the global component challenges. This is a positive and also, as mentioned, mitigating actions to secure supply of finished goods in future quarters.

In terms of cashflow from investment activities, this came in at -- $0.6 million. I just want to flag here that this, according to IFRS principles, were now capitalizing R&D activities, and this is reflected as internally generated intangible assets. In addition, you have the purchase of software production tool and in diverse office equipment that goes into this post.

Moving finally the cash flow from financing activities, this was +$0.5 million. On the downside, there was some equity issuance and payments for lease liabilities, and this was more than mitigated by positive FX effects in the quarter.

And with that, I will give it back to Oyvind.

[Oyvind Birkenes, executive]

Yes, thank you. So we'll do a quick summary. So strong revenue growth in the first quarter, we have resupplied inventory, so we are ready for more business moving forward. Still keeping strong gross profit margins. And in the longer term, we'll see as the ARR was taking a bigger share of revenues, gross profit margins will improve.

Very strong momentum now in Airthings for Business. Even now in the first quarter again, with more than 100% growth. And we see a lot of activities in new regions and in existing regions with the consumer segment and also some new, good strength, and strategic partnerships. ARR is continuing to grow fast and 87% up year-over-year. So outlet for second quarter is $8 to $9 million, and the ARR of $3.3 to $3.7 million. And then we are working on the transitioning to the main list of those low stock exchange, and that's scheduled to happen now in June this year.

We still see a very exciting long-term outlook for the company. We still have our plans for 2024, and that's now transitioned over to US dollars. So we are going to do more than $100 million in 2024 with IFRS transition, and also more than $20 million of annual recurring revenues. And our long-term EBITDA margins still stand that we are going to do more than 25% in the long term. And the consumer segment, we see enormous opportunities. We have amazing products getting great product reviews, and we're going to continue to expand in new and existing channels around the world.

There are Airthings for Business, we have a proven track record now with a partnership model, and we have a broad range of partners. We have some really great partners that are doing exciting things with our solutions, and we are just seeing the beginning of what Airthings for Business can bring. So we have the plan for consumer segment to do more than $60 million in 2024, and Airthings for Business to do more than $40 million in 2024 with $20 million in ARR. So with that, I will open up for any questions.

[Jeremy Gerst, executive]

The first question that came in online. I believe this question came in before you touched on the topic, but maybe you want to expand. Can you please elaborate more around the short-term headwind to Airthings for Business following the restructuring of the sales team? When do you expect this to be in place?

[Oyvind Birkenes, executive]

So we already have a team there, but it's a small team right now, and we are hiring more people to the team. So the pipeline is a bit weak now, but we have some very big cases that we're working on. So the biggest share of the Airthings for Business revenue comes from Europe and the rest of the world. And we're rebuilding the pipeline for US. So the long-term outlook is very strong. There's some uncertainty in the second quarter for Airthings for Business in the US.

[Jeremy Gerst, executive]

The next question, are there any particular sales channels in the consumer segment where you expect to see more headwinds going forward? If so, what indications have you received from these channel partners?

[Oyvind Birkenes, executive]

Yes, there's not any specific one. I mean, we see -- we saw in March that kind of sell-through was a bit weaker, but then we saw it came back again in April. But it's a bit difficult to say. What we hear from retailers is that they're cautious to take on inventories. There's a bit wait and see to see how this is going because I think most retailers saw like a setback in March. I think the whole market is a bit cautious now. Like everybody wanted to secure inventory during the COVID crisis and component crisis, and then they got this new crisis, and then people are a bit more cautious.

[Jeremy Gerst, executive]

Great. The next question is 2 questions, 2 parts. I'll read the first one. Could you give some color on how much inventory there is in your channel partners? Could this be an issue in second quarter and beyond if customer sentiment doesn't improve?

[Oyvind Birkenes, executive]

We don't report directly on the inventory we have, and it's very kind of balanced inventory. I mean, we want to ship products every quarter, so we don't inflate our partners or our retailers or eCommerce partners. So I don't see any big change there, but we saw certainly that there was a bit weakness in the consumer market in March following the war in Ukraine and inflation. But then we saw it picked up again in April. So people are buying from our channel partners, and we have good growth year-over-year, but it's still a challenging or a bit uncertain market, I would say. It's very hard to predict.

[Jeremy Gerst, executive]

Great. And the second part of the question, can you give some brief comments on what Airthings for Business outlook is for 2022? Any big opportunities in the pipeline?

[Oyvind Birkenes, executive]

Yes. So they have a strong pipeline in Airthings for Business. There are big projects that we're working on, but the timeline on those product are always uncertain. So it's very important to have a wide pipeline with many projects because you never know what's being delayed, what's coming in the coming quarter, et cetera. But I can certainly say that there are very interesting partners we're working on, and also very interesting projects. We have very strong belief in Airthings for Business.

[Jeremy Gerst, executive]

Another question on the topic of Airthings for Business. You said the pipeline is weak for Airthings for Business. Can you please clarify that this is only the case for the US? While consumers looking South this year, are you still confident in Airthings for Business outlook for 2022 set out in conjunction with CMD?

[Oyvind Birkenes, executive]

Yes, and nothing has changed from our CMD. And the pipeline, we see for Airthings for Business, the weakness there is in the US as we've been restructuring the whole team and really gone through the whole pipeline and rebuilding it. Still, very interesting cases we are working on in the US, but the pipeline is not as broad and deep as we have it in Europe and rest of the world. So for Airthings for Business, we have a much stronger pipeline right now in Europe. What was there? Did I answer it all?

[Jeremy Gerst, executive]

I think you answered it all.

[Oyvind Birkenes, executive]

Any from those in the audience?

[Unknown Attendee]

Number of employees, how many people?

[Oyvind Birkenes, executive]

Now we are, so, 145 employees.

[Unknown Attendee]

Are you going to strengthen your development or sales basically in -- going forward?

[Oyvind Birkenes, executive]

So our focus now is, I mean, we're strengthening the team in many direction, but the biggest investments goes into the sales teams.

[Unknown Attendee]

I find one in terms of the figures, you still losing money but you have sufficient cash on the balance sheet it seems. So, when do you think you will turn profitable?

[Jeremy Gerst, executive]

As we've stated previously…

[Oyvind Birkenes, executive]

You need to write it because people won't…

[Jeremy Gerst, executive]

Yes, they won't hear the question. The question was that we had plenty of cash on the balance sheet, but we are losing money or we have losses right now. When do we expect to start being profitable? As we stated, we expect towards the tail end of 2023 to start turning profitable on a quarterly basis.

[Oyvind Birkenes, executive]

All right. Thank you. And looking forward to the next update.